Jet2’s market valuation suggests the company is experiencing a hugely challenging operating environment. Shares in the airline and package holiday firm currently trade on a price-to-earnings ratio of just 8.
A rating that low is normally reserved only for businesses with lacklustre profits and downbeat financial prospects.
However, the AIM-quoted company’s recently released annual results paint a very different picture to that suggested by its bargain basement market valuation. In the 12 months to the end of March this year, for instance, the firm’s revenue rose by 24pc as it delivered record passenger numbers.
Although the company’s load factor declined by 0.7 percentage points to a still relatively impressive 89.8pc, a 10pc rise in seat capacity meant that total passenger numbers were up 9pc versus the prior year.
With customer numbers in its highly profitable package holiday segment increasing by 15pc year-on-year – now representing more than two thirds of total flown passengers – the company’s pre-tax profits surged 43pc higher to a record £530m.
Furthermore, the company’s future financial prospects are becoming increasingly positive. While many investors will argue that an annual holiday is more akin to a staple item than discretionary spending, Questor firmly believes that the cost of living crisis has negatively impacted the amount spent by holidaymakers over recent years.
With annual inflation falling 5.9 percentage points over the past year and now resting in line with the Bank of England’s 2pc target, pressure on disposable incomes has all but evaporated.
Indeed, average pay is now rising by 2.2pc per annum in real terms, having increased at a faster pace than inflation since April last year and boosting the purchasing power of consumers. With interest rate cuts ahead, which will reduce mortgage costs and encourage the economy to grow at a faster rate, the outlook for consumer-focused stocks such as Jet2 is upbeat.
The company’s improved financial performance means it can reinvest in future growth opportunities. Its annual results, for example, confirmed that it has exercised its remaining aircraft order purchase rights with Airbus.
This means it will take delivery of 146 new aircraft over the next eleven years that will not only replace its existing aircraft but also increase its fleet size from a current figure of 127.
New aircraft that supersede older aircraft offer significant cost reductions due to their improved fuel efficiency. They also provide a superior customer experience, thereby bolstering the company’s financial performance and competitive position.
Despite its significant ongoing investment, the firm continues to enjoy a sound financial position. Net debt excluding advance customer deposits currently amounts to just £124m, which equates to a net gearing ratio of only 9pc.
Meanwhile, the company’s large cash balance meant that finance income was greater than finance expense in its most recent financial year. This further strengthens its capacity to overcome any future periods of economic uncertainty.
Investors clearly believe such a period lies ahead, judging by the exceptionally wide margin of safety presently included in Jet2’s share price. In Questor’s view, though, modest inflation, falling interest rates and sustained real-terms growth in average pay mean the prospects for consumer-focused stocks are more positive now than they have been for many years.
Indeed, consumer confidence has risen at a brisk pace over recent months and currently stands at its highest level since September 2021.
Although the firm reported that consumers are choosing to book holidays closer to their departure dates than would typically be the case, package holiday customer numbers are nevertheless up 7pc for the summer 2024 season.
They represent 72pc of overall flown passengers for summer 2024, which is likely to benefit the company’s bottom line due to the higher margins generated by package holidays. Less profitable flight-only passenger numbers are currently up 16pc.
Since Jet2 was added to our AIM portfolio in January 2018, it has produced a 103pc capital gain. This represents a 131pc outperformance of the FTSE AIM All-Share index, which is highly encouraging.
Investors should stick with the stock for a good while longer. The company’s extremely low valuation, improving operating environment and sound long-term growth strategy mean it is set to generate rising sales and profits. This should equate to further capital gains and index outperformance over the coming years.
Questor says: hold
Ticker: JET2
Share price at close: 1,369p
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